Fintech’s boom and bust spells trouble for startups

Fintech valuations soared before crashing back down. Now the private markets face the same reckoning.

A piggy bank on fire.

There’s going to be a lot of carnage and failed startups along the way, but for a fintech industry that was already pretty frothy, it might be healthy to skim some of the fat.

Image: D-Keine via Getty Images

The higher you climb, the harder you fall — and that spells trouble across the board for fintech startups right now.

“Fintech probably grew the fastest in the last two years in terms of valuation,” Better Tomorrow Ventures’ Sheel Mohnot said. “As we reset to how it was a few years ago, fintech has the farthest to fall.”

Already fintech multiples plummeted faster, and harder, than the rest of the tech sector. A chart published by a16z shows that the peak of forward revenue multiples for fintech companies was in October 2021 when it hit near 25x. Now, it’s nosedived to below 5x.

  • This is a worse slide than sectors like the cloud, according to data from F-Prime Capital. Up until 2019, fintech had been in relative lockstep with the emerging cloud index, but it ballooned in 2020 and 2021 to be way above the performance of cloud companies. But since the beginning of the year, F-Prime’s fintech index has been crashing. It fell below the cloud index at the end of March.
  • As public fintech companies are seeing their market caps shrink, it’s going to be harder for private companies to justify their own rich valuations. Publicly traded Marqeta has a market cap now around $6 billion and processed over $100 billion in transactions last year. There are similar startups doing a sliver of Marqeta’s volume but with valuations at or near $1 billion, Sacra’s Jan-Erik Asplund pointed out — an outsized mismatch.

The trickle-down from the public market’s reset hit extra hard this week. More fintech startups began to make cuts. Some might find themselves raising a down round. Of the 19 layoffs listed on Layoffs.FYI this week, nine were at financial companies.

  • Klarna told employees it would lay off 10% of its workforce via a video message this week. “When we set our business plans for 2022 in the autumn of last year, it was a very different world than the one we are in today,” CEO Sebastian Siemiatkowski said in the video. It was rumored that the company was going to try to raise its valuation from last summer’s $46 billion to $60 billion in February, but it’s now facing a potential valuation cut down to $30 billion.
  • Fast was the first to collapse, but now its rival Bolt has had to lay off hundreds. Its layoffs are a particularly nasty kind after many employees took out loans to exercise their stock options.
  • MainStreet, which helps startups discover tax credits, already laid off 30% of its staff weeks ago. Now TechCrunch reports that it’s potentially facing a 60% discount in its valuation as part of a recap.

“The scary thing in the short term is we haven’t had a valuation reckoning yet,” one growth-stage fintech investor told me. While we’re starting to see some signs like the news of the week, there are many many more startups that haven't gone out to fundraise and face being re-priced.

  • Global fintech funding hit $132 billion in 2021, more than double the $49 billion raised in 2020. That means there are a lot of companies sitting on war chests of cash that have at least a year or 18 months of runway before they need to raise again.
  • The lingering question is how long any of this will last. Some investors like Mohnot have already marked down some of their portfolios, and more firms will follow suit. The question the growth-stage investor said they face is where exactly things need to be priced to. As they put it: The market was probably never as good as the overvalued 21x multiple but it’s probably not as bad as the 3x-4x seen today. That leaves extra uncertainty for founders not sure where to reorient their revenue targets.

The one silver lining: Founders will be forced to build better businesses when the tailwinds are gone and people don't just write a $100 million check because you say you’re a fintech company. There’s going to be a lot of carnage and failed startups along the way, but for a fintech industry that was already pretty frothy, it might be healthy to skim some of the fat. “In the overheat of 2021, there was just money going after everything and founders didn’t have to learn what product market fit felt like, and now they will,” Mohnot said. “Being a founder is about to get a lot harder, and when it happens a lot of tourist founders leave the ecosystem.”

This story also appeared in Protocol Pipeline. Sign up here to subscribe to Biz Carson’s weekly newsletter on startups and venture capital.


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